Stock valuation - bit of an unusal one or I'm being a muppet

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Firstly apologies if this is covered elsewhere I did have a good look but could not find anything - first time posting.

I have just taken on a new Ltd Company client. The company is 3 years old - the accounts I am preparing are the third set for the year ended 31 December 2010, I have just taken them on from another firm.

The company is made up of 1 director who has invested £150k as a directors loan. The company buys equity shares in FTSE100 companies, holds them for anywhere between 3 months and 18 months and then sells them - pretty simple.

The previous accountants recognised revenue on the completion of a company share or investment transaction for example, they buy £1,000 of shares in company X in 2009, these are then sold in 2010 for £1,200, the £200 revenue is recognised in the YE 31 Dec 2010 accounts.

That's the background so my question is; if the company holds £100,000 of shares (stock) at the year end in 2009 and nothing changes in the company at all apart from the shares going up and down in value, at the end of 2010 the shares are worth £90,000 - obviously the stock figure will decrease by £10,000 but what is the other side of the double entry?

Does it effect the profit and loss this year, do I need to make an adjustment to last years retained P+L, do I create a stock revaluation account or something like you would when a company holds different currencies??

Sorry if this is quite a simple question but I've been staring at excel spreadsheets and bag loads of share info all day and my head is about to explode!!

FRS 26 is the UK GAAP equivalent of IAS 39 - both relating the the recognition and measurement of financial instruments. These are part of the IASB 'Convergence' project thus are fairly interchangible if your more fimilar with IFRS. The ASB website for FRS 26 is provided below for reference:

So down to business. The stock held is FTSE100 shares which will be classed as financial assets. These financial assets will be classified as 'held for trading' from the outset as this is the nature of the business thus designated 'fair value through profit and loss' financial assets. Per FRS 26 financial assets held for TRADING must be (i) recognised and (ii) measured at FV. As such for YE Dec 10 accounts you will need to ascertain (and document) the FV of the FTSE100 shares at this date (don't forget to review the next month for any significant post-YE events!).

The next question is the other half of the double entry, P&L A/c or B/S? Per FRS 26 financial assets held for TRADING must be remeasured to FV (as noted above) with any gains / losses recognised immediately in the P&L A/c. Note if the financial assets were purchased for investment rather than trading purposes they would be classified as 'available for sale' financial assets with revaluations recognised in the B/S - however this is not the case.

What the previous accountant was doing is correct as long as the FV of the financial assets were remeasured to FV @ YE with any gains / losses recognised in the P&L A/c.

does not say the size of this company however I would have thought its covered by the FRSSE hence FRS 25/26 would be irrelevant.

If so what this company is doing would be governed largely by:

1. what the principal activity note states.

2. How the shares are treated basically whether stock or FA investments.

Appears to me that given such a short maximum holding period this company is trading with a view to making a profit from sale rather than holding as long term investments. QED revenue should be recognised at full value (i.e. in the e.g you give @ £1200 with £1000 COS not just £200 profit). Further QED stock of shares is recognised as usual at the lower of cost/NRV so the double entry in your e.g. would be Dr COS P&L Cr Stock balance sheet £10,000.

If there is a duality of activity and some are held for long term investment purposes then they would be shown under Fixed asset invetsments and not revalued unless that was the companys a/c policy. Any diminution unless deemed to be permanent would not be reflected but disclosed by way of note to the accounts as usual.

Hi Coeus, thank you ever so much for your detailed reply - I think you make some good points, however the company is very small so maybe not so relevant to this issue but I'm very grateful for your thoughts and for you taking the time to post.

Hi Penbo, I think you are spot on, this is exactly how I was thinking of treating the stock - thank you so much for confirming this is my head.

I have just one more question - The accounts in year two were not prepeapred correctly, the stock decreased in value by £8,000 and this was not shown on the Profit and Loss - what was submitted to CH and HMRC shows a loss of £1k rather than the real loss taking into account the drop in value of stock of £9k.

Would you:

a) Go back and resubmit accounts to CH and HMRC and resubmit a new CT600

b) would you make an alteration in the prior year P&L in this years accounts and let HMRC know by simply writing to them?

c) Take the £8k loss not included in the prio years accounts and simply include it in this years accounts?